Like a polyester suit, the “at-risk rules” of the 1970s are both ugly and indestructible. They were enacted to combat tax shelters based on buying cattle or equipment with loans that were “non-recourse” — if the partnership didn’t pay the loan, the lender could only get back the cows or the tractors, and the partners were scot-free. Because the debt increased partnership basis, this enabled partners to buy deductions by buying interests in leveraged partnerships — often with loans nobody ever expected to collect – holding depreciable assets.
The at-risk rules defer losses attributable to basis that is not “at-risk.” On a K-1, the partner’s share of debt is helpfully broken into three categories:
There is space for the “recourse” and “nonrecourse” liabilities of the partnership. The “non-recourse” liabilities are normally not “at-risk,” so if you need the basis on that line to deduct your K-1 losses, you may be out of luck.
You’ll also see a space for “qualified non-recourse financing.” This is a tribute to the real-estate lobby of the 1970s, who won special treatment for non-recourse debt incurred in real estate activities. Nonrecourse debt that meets certain conditions – mostly debt from commercial lenders or government agencies – is “qualified nonrecourse financing” and is deemed to be “at-risk” under the tax law, even if it isn’t in real life.
If your losses exceed your other basis, you compute your at-risk disallowance on Form 6198.
Even if you have basis and it’s at-risk, you still might not get a deduction. If your loss is “passive,” then it may deferred until you have “passive” income or until you dispose of the passive asset.
Just another swell 2013 filing-season tip! More through Monday.